Town Square

Mortgage Meltdown

Original post made
by Burst Bubble, Another Palo Alto neighborhood,
on Oct 15, 2007

An interesting article appeared in Sunday's Chronicle outlining foreclosures and the zip codes where they occurred (Section 1, page All). Is it a surprise that Palo Alto had 40 foreclosures in the 94303 zip (rate of 9.5/1000)? Has the bubble finally burst?

Posted by reader
a resident of Greenmeadow
on Oct 15, 2007 at 10:21 pm

What's sad but not surprising is that the 40 foreclosures are in the part of the 94303 zip that is in San Mateo - East Palo Alto in other words. Under Santa Clara Co. there is only one foreclosure listed for Palo Alto.

Posted by OhlonePar
a resident of Duveneck/St. Francis
on Oct 15, 2007 at 11:07 pm

Wonder what the PA foreclosure was? Even one's unusual in PA. I haven't seen indications that the bubble's actually burst in Palo Alto and with Google over 600, I'm not sure how much it's going to burst.

Posted by Victor Vyssotsky
a resident of another community
on Oct 28, 2007 at 5:50 am

The problem for Palo Alto itself, as distinct from East Palo Alto, is not going to be foreclosures; it's going to be the inability of people who wish to sell to get anywhere near what they assume their homes are worth. That's not because of a lack of potential buyers; a lot of folks would be happy to own a home in Palo Alto. It's because mortgage money is going to be real tight for a while, so buyers, finding they can't get mortgages on the terms they would like, will be forced to limit themselves to lower offers consistent with what they can get in the way of a mortgage. But, if you own your home as a place to live, not as an investment, and have no reason to move, you're in good shape in Palo Alto. Just sit tight until the current mess gets itself straightened out.

Posted by susie
a resident of Palo Alto Hills
on Oct 30, 2007 at 10:05 pm

You are right and wrong.

The foreclosures you can see online WERE in East Palo Alto, and now one has just popped up on South Palo Alto.

There will be more.

The bubble is a bubble of huge proportions. It will pop big.
Palo Alto is not isolated from the world.

Affluent suburbs just experience a delay in bubbles.
The foreclosures happen elsewhere, then people in the expensive suburb start to buy elsewhere THEN prices in the expensive suburb come down.

If you look at salaries in Palo Alto there is no reason that people can afford these 2 million for a decent home. It was propped up by jumbo mortgates. Not everyone works for Google. Jumbos will become hard to get and Pop there goes the bubble.

PLus lots of start ups will not be able to get bridging finance to go public due to credit crunch. This will mean their owners will go bust and have to sell their houses.

Wait until 2008 and I predict 30% will come of Palo Alto houses, not suprising when you think that they went up 40 percent in the preceeding few years.

Posted by Sparky
a resident of Barron Park
on Oct 30, 2007 at 10:20 pm

Wow Susie, that's quite a crystal ball! Stock prices are up a lot too - are they going to crash too? We could make a lot of money!

Credit crunch hitting starts ups hurting housing prices, huh? Just about all start-ups are equity financed, not debt, and the private equity/venture capital funds are awash in cash and financing levels are at record highs. The IPO market is pretty good too. Guess those CEOs won't be going to the poor house overall.

The fact is that affluent 'burbs, especially ones with quality school districts and non-cyclical institutions like universities and hospitals, have a built in demand that is not as sensitive to the economic cycle. Generally they experience less peak-to-trough dip vs. "up and coming" areas, which really feel the brunt.

Posted by Susie
a resident of Palo Alto Hills
on Oct 30, 2007 at 10:27 pm

But think back. Why are the VCs currently awash in cash? Because easy credit enabled people to make the money in the first place. Those who invest made it probably with easy credit. Once they have invested their way through this glut of funds and the investments fall on barrON soil then thats the end of it. There is just a delay in bubble burstings.

Posted by Mike
a resident of College Terrace
on Oct 30, 2007 at 11:51 pm

Susie,

Palo Alto is a community that people *choose* to live in, for ohighly sibjective reasons - they make conscious decisions to spend more, based on subjective value. San Francisco is another city like this - there are others.

You will NOT see a real estate crash here. Anyone who thinks that will happen does not understand consumer behavior, or real estate economics.

Susie may be overstating things, but I think she's generally right. I know plenty of people in the area that leveraged themselves to the moon to buy a house-- zero equity. They are at risk.

Have you priced a jumbo loan lately? Ouch.

Mike, housing prices corrected MORE in Palo Alto and Los Altos then in surrounding cities in '01. In some very high end markets, there have been 50% corrections, so what is it about 'real estate economics' that says there can be no crash in PA? If the market places an x% premium on PA homes, what happens when surrounding markets drop? The X% premium stays in place, of course, but is applied against a lower baseline. Sparky, universtiy and hospital workers do not pay $2M for homes, therefore have no direct impact on the market. PA Schools are overcrowded and poorly run which will at least somewhat limit their positive effect on housing prices eventually.

We'll see Eric. The university and hospital "workers" (I'm not sure I would call doctors and professors/administrators "workers") in my neighborhood all have $1+ million in home equity from being out here a while, so yeah, they can buy $2M houses if they want. You obviously don't have appetite for the place, but plenty of others do. House just sold on my block in 1 week for a very high number.

The big swings usually happen at the very high end (luxury housing) and in the areas at the edge (big swing up, big swing down). Established neighborhoods tend to feel it less. But we'll see.

Posted by Mike
a resident of College Terrace
on Oct 31, 2007 at 8:47 am

Inventories of o$1-$1.5M homes are flying off the shelves. Upper cap constraints (over $417K have started to ease). Properties under $1m, and over $1.5M are slow, but starting to pick up.

We will see slowness in the market - on and off, for about another 9-12 months, with appreciations continuing in the low single digits.

Homes are still a good investment bet here. Elsewhere? It's anyone's guess.

As for VC funds, there are billions in dormant funds; VC's have had to start giving back management fees, and recently have been sending money in the direction of solar, Web 2.0, and other selected investments (nano, etc.). There's still a glut of uninvested capital, and that will probably continue.

The VC model is beginning to shred at the edge, anyway. And, let's face it, the batting average of almoist every VC - even the better ones - is not that great. Most VC's are, in fact, lemming-like in their behavior. Overall, an overrated segment of the investment market.

I live in MV FOR the schools, Mike. I'll take innovation over overcrowding any day. Test scores arent the whole story

Sparky, you are correct about the untapped equity, but the (relatively) modest income folks you describe will be more sensitive to any additional debt load, not to mention higher property taxes. Most (not all) docs and professors arent in a position to buy a $2M home without some equity to roll in.